I know Kung Foo, Karate, Bond Yields and forty-seven other dangerous words.
– The Wizard
For forty-four years I have trafficked in the bond markets. I have seen massive inflation, Treasury yields in the stratosphere and risk asset spreads that could barely be included on a chart. At four investment banks I ran Capital Markets, and was on the Board of Directors of those companies, and I have witnessed both extreme anger and one fist fight. It is funny, you know, how people behave when money is sitting there on the table.
One of the things rarely discussed in the Press are the mandates of money managers. Almost no one is unconstrained and virtually everyone is bound by regulations, the tax laws and FINRA and SEC stipulations. Life insurance companies and casualty companies and money managers and Trust Departments and everyone is sidled with something. There are no escapes from the dilemmas.
The markets are a random lottery of meaningless tragedies, a couple of wins and a series of near escapes. So, I sit here and I smoke my cigars, staring raptly at it all. Paying very close attention.
There are two issues, in my mind, to be considered carefully when assessing future interest rates. The first is supply, especially the forward borrowing by the U.S. government. “It’s supply,” Michael Schumacher, head of rate strategy at Wells Fargo (NYSE:WFC), told CNBC’s Futures Now. “When you think about the enormous amount of debt that U.S. Treasury’s got to issue over not just this year, frankly, but next year, it’s staggering,” he said.
Using Michael’s calculations, the Treasury will issue more than $500 billion in notes and bonds in the second to the fourth quarter, pushing the total to around $650 billion for the year. Last year, the total came to just $420 billion. That is approximately a 35% increase in issuance. This raises a fundamental question, who are going to be the buyers and at what levels?
The second issue centers on the Fed and what they might do. They keep calling for rate hikes, like it is a new central bank mantra, and they are increasing the borrowing costs of the nation, corporations and individuals, as a result. I often wonder, in their continual clamor for independence, just who they represent.
You might think that the ongoing demand for higher yields does not exactly help the Treasury’s or the President’s desire to grow the economy as the Fed moves in the opposite direction and tries to slow it down by raising rates. I have often speculated that there might be some private tap on the shoulder, at some point, but no such “tap” seems to have taken place or, if it has occurred, it is certainly being ignored, at least in public.
Here are some interesting questions to ponder:
How much of our U.S. and global growth is real?
How much of it, RIGHT NOW, is still being manufactured by the Fed’s, and the other central banks’, “Pixie Dust” money?
Does the world seem honestly ready to economically walk on its own two feet?
If you answered “No,” to the last question, how do you believe the financial markets will react when they realize that the Central Banks are trying to take away the safety net for the global economies?
Are you really worried about inflation running away from us?
Do you believe that a flat/inverted yield curve has been an accurate predictor of events to come, historically?
Have you run the numbers, can the world’s sovereign nations even afford 4% rates, as predicted by many?
If you answered “No,” do you believe that these nations will suppress yields for as long as they can to push back the “end game?”
Across the pond Reuters states,
Italy’s two anti-establishment parties agreed the basis for a governing accord on Thursday that would slash taxes, ramp up welfare spending and pose the biggest challenge to the European Union since Britain voted to leave the bloc two years ago.
That is quite a strong statement, in my opinion. There are plenty of reasons to be worried about Italy and the European Union now, in my view.
A draft of the accord, reviewed by Reuters, lays out a plan to cut taxes, increase welfare payments and rescind the recent pension reforms. To me, this seems incompatible with the EU’s rules and regulations. These new policies would cost billions of euros and would certainly raise Italy’s debt to GDP ratio, which already stands at approximately 132%.
Reuters also states,
The plan promised to introduce a 15 percent flat tax rate for businesses and two tax rates of 15 and 20 percent for individuals – a reform long promoted by the League. Economists say this would cost well over 50 billion euros in lost revenues.
Ratings agency DBRS has already warned that this new proposal could threaten Italy’s sovereign credit rating. If you have been to Rome, you probably visited the Coliseum. I make an observation today:
The Barbarians are at the Gates!
– Mark J. Grant